Canara Robeco Manufacturing Fund NFO: Should you invest?

Canara Robeco Manufacturing Fund is a new fund offer (NFO) and it is open till March 01, 2024. The open-ended, actively managed scheme will invest in companies engaged in the manufacturing theme and will be benchmarked to S&P BSE India Manufacturing TRI.

Manufacturing as a theme is gaining interest in Indian investing space. This NFO will be the eighth fund with the manufacturing theme of which four of them were launched in 2022 alone. There are several tailwinds to the theme, which makes it an interesting avenue to invest, actively or passively.

But there are other factors which need to be monitored before the manufacturing theme delivers results.

We breakdown the pros and cons of the theme and list the other players in the space before recommending the NFO.

Tailwinds in manufacturing

The fund aims to invest in companies focussed on domestic demand, firms gaining from policy reforms, private capex and alternative supply chains for the World.

The foremost tailwind is the notion that economies with more than $2,000 per capita GDP will witness a rapid expansion in consumption and hence domestic demand should expand significantly. India, which has a GDP per capita of $2,600, is expected to follow an exponential growth path as was the case in China and other developed economies prior to it. While this is only an expectation and a large part of FDI/FII optimism and domestic flows are based on it and so is the manufacturing theme.

While the notion is still nascent, global supply chain management is showing an inclination to source basic to key intermediates from economies other than China. Terms like friend-shoring and near-shoring of supply chains are allied with the larger strategic intent of developed economies. India is showing encouraging signs in speciality chemicals, tiles, mobile phones, 2W and other industries buoyed by the shifts in international trade.

Indian policymaking is aware of the shifting trends in global supply chain order and has started on a path of policy reforms to strengthen India’s case as a manufacturing hub. Production Linked Incentives is a pivotal step in that direction.

Overall, the PLI scheme has committed 2.63-lakh crore towards the scheme. The scheme has seen strong success in electronics and witnessing interest in textiles and mobile manufacturing sectors. Pharma, auto and alternate energy solutions are also expected to gain in the scheme. Improvement in ease of doing business rankings, tweaks to Labour laws and a duty structure focussed on import substitution are the other key policy reforms supporting a growth in manufacture in India theme.

Markers of a turnaround

Manufacturing as a percentage of GDP has been range bound at 16 per cent for several decades and a transformation, if possible, should be a long-drawn-out affair. Even in the recent trends, India Inc has been struggling with volume drivers in its growth, which is visible in FMCG, retail and consumer facing sectors.

A drop in commodity prices recently and post-Covid recovery earlier supported earnings and valuations growth. But a strong demand pull has been starkly missing in India Inc.

Government capital expenditure growth at 27 per cent CAGR in the last five years may most likely slowdown to low double digits to reign in fiscal deficit, which will most likely drag the overall economic expansion. This is being countered by expectations of private capex plugging the gap, especially considering the strong balance sheet positions. While strong return metrics and deleveraged balance sheets are a strong support to the expectations, the low base of private capex and range bound growth in capex to 8-9 per cent may not be sufficient.

Peers and NFO recommendation

There are seven other funds operating in the same theme and have delivered returns in the range of 44-64 per cent in the last one year compared to the benchmark returns of 45 per cent. Of the lot, Aditya Birla Manufacturing Equity Fund and ICICI Prudential Manufacturing Fund have existed for more than five years delivering 17 and 26 per cent CAGR returns in the last five years. The ICICI fund can be considered for investments as a diversifier. Ideally, it would be better to take exposure in the Canara Robeco Manufacturing Fund after it develops a track record.

However, considering the strong macro and domestic factors underlying the manufacturing theme, if investors with a high-risk appetite wish to explore more of the them, they can invest a small sum in the NFO or take the SIP route.

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